Compound interest is a powerful concept that can significantly boost your wealth potential over time. It is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan. The key to maximizing the benefits of compound interest is time. The longer your money is allowed to grow and compound, the greater the impact it will have on your overall wealth.

For example, let's consider two individuals, A and B, who both invest $10,000. A starts investing at the age of 25 and consistently invests $2,000 per year for 10 years, while B starts at the age of 35 and invests $2,000 per year for 30 years. Assuming an average annual return of 7%, A would have around $402,492 at the age of 65, while B would have approximately $340,595. Despite investing $10,000 less, A ends up with a significantly larger sum due to the power of compounding over a longer period.

References:

• Forbes - The Power of Compound Interest: How to Make It Work For You
• Investopedia - Compound Interest Definition